Autumn Might See Gold Trading Down Before Rebounding

Gold bulls and gold bears can profit if they know their trading time frames.

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One hallmark of a successful trader is knowing the time frame on which he or she is trading. In this respect, the long-term investor has it easier than the trader. There's a certain peace of mind that an investor may find in buying a fund or issue that appears to have growth potential, and then sitting back and waiting for the investment to incubate. A trader has to approach the market with a different mindset.

The trader's advantage, though, is that good trades will cover far more price movement than an investor can ever hope to see. However, it's crucial to keep one's trading practices consistent with the time frame. This week, we offer some examples of why that is so, using the current gold market as a case study. We'll also tell you where we think the gold market will go from here.

First Example: "There and Back Again" Since April

The gold trade from April was down, not up. At a time when many were looking for continuation upward, we saidthat gold needed to test lower before the downward corrective move from 2011 could be seen as complete. We also projected the $1,220 price area as a likely target, almost $250 below the then-current price of $,1462. In the April post, we showed various reasons for support in that vicinity, noting especially the Elliott Wave pattern and a long-term channel boundary.

Price reached the support area at the end of June and poked slightly below it before starting an earnest bounce. (Notice there was not a weekly or monthly close below the channel line.) Any long-term investors who got in at the time probably should consider it a successful entry point for accumulating part of a position. As we noted in our July 19 post, long-term investors also should be prepared to see gold make one or two lower lows before a stronger upward wave can begin.

Any readers here who took the short trade from late April area saw a price change of $200 to $250 in their favor. And then they could have ridden the move back up from the $1,220 area for an additional $175. When you look at gold from this perspective, who cares if it's destined to go to $3,000 someday? You can make plenty of profits riding the waves between here and wherever it goes. In fact, a trader can end up right back where he or she started, and be richer for the ride.

Second Example: Knowing Your Time Frame Defines Your Risk and Keeps You Focused

For any traders who entered long around the $1,220 area, congratulations for identifying support and staying in the trade. And now, the trade is probably over. As you can see on the daily chart below, the rally has reached into the area where it would make sense for a retrace to end.

A trader who has identified the proper size of trade for his or her account might have entered preemptively around $1220, based on the levels and channels we mentioned in earlier posts and that can be seen in the charts here. However, the preemptive trade generally is not something we recommend, because it is difficult to determine where stops should be placed. The trader has to allow considerable room, and that takes a toll emotionally.

Better, the trader might have entered slightly after price made its first higher low, around $1207. In that case, it's clear that the stop should have been placed just below the prior low, leaving the risk entirely defined. As long as that risk was small enough not to damage the trader's account, then the trader could stay in the trade with confidence.

Knowing one's time frame is important, because it tells the trader not to dwell on the price wiggles that will appear on smaller timeframes. In this case, the trade was first seen and defined on a weekly chart. The entry was spotted on a daily chart. During the trade, remaining focused on daily movement would have kept the trader on track (with the single exception of having a protective stop placed so it could be hit intraday).

Third Example: Seeing the Trade on a Higher Time Frame, Executing It on a Lower One

There probably are a few good trades left between now and the end of the big correction. Those opportunities should be traded on a daily time frame, but they are more easily seen on the weekly and monthly timeframes.

So where will gold go from here? At the moment, the rally from the late-June low should be seen as a retrace -- part of what could be an ending diagonal forming to complete the large correction of the past two years. We have diagramed this, our primary scenario, on the weekly chart below. The Elliott Wave count on the weekly chart corresponds with the count labeled in black on the daily chart above, and it calls for two more lower lows before a bigger rally can occur.

A variation on the ending diagonal scenario is not shown on the weekly chart, but is shown with green labels on the daily chart. The effect of that would be to produce just one lower low before a larger rally.

As traders using Elliott Wave, we always have to consider the "what ifs" that would tell us our projection and trading plan is wrong. Two possible alternatives are more easily seen on the monthly chart, below.

The first alternative would be if the June low was the final part of the correction. On a monthly timeframe, the count for that idea looks okay, although it doesn't look quite as defensible on weekly and daily charts. In any case, if price were to exceed the May high of $1487.20, that would be an indication that the low is probably already in. Traders who took advantage of the move up from late June could get back on the trade after seeing confirmation, and they'd be farther ahead with minimized risk.

The second alternative would be for the whole downward move from 2011 to be more than just a 4th wave correction. That would be confirmed if price were to go below $1,102.20, the level of the previous 1st wave. Breaching that level would almost certainly spark selling, although it is not clear whether it would result in a sustained move downward. We believe this scenario is unlikely.